Two-Front War on Estates

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As the end of 2009 draws near, Congress is racing to meet self-imposed deadlines to pass a climate bill and health care reform by the end of the year. But the clock is running out on another serious issue if Congress doesn't do anything to fix the law by Dec. 31.

Next year one of the most reviled and cumulative taxes in the federal code - the death tax - gets phased out pursuant to tax-cut legislation passed in 2001. The death tax, politically known as the estate tax, is set to disappear for one year at the end of 2009 if no congressional action ensues before then. But this victory is fleeting, and, like a creature in a late-night horror movie, the death tax comes back with a vengeance in 2011 at its 2001 rate of 55 percent.

While opinion polls have shown time and again that Americans oppose the death tax, the Obama administration's current budget assumes that Congress will continue the tax in perpetuity at a 45 percent rate.

The president is also seeking to further increase the burden of the death tax by removing the current discounts available to recipients of family farms and businesses.

Numerous proposals are floating around in Congress to address the death tax and could be acted upon yet this year, ranging from the good and the bad to the ugly. Yet there is little prospect that consensus will be reached on the most prudent course -- one that recognizes that the reimplementing the death tax is the wrong path, particularly during a recession. This is not the time to make permanent a tax that punishes savings and investment, and thereby diminishes growth (not that there is ever a good time for such an action).

House Majority Leader Steny H. Hoyer recently announced that the House of Representatives will take up legislation on the estate tax in the coming weeks. This legislation will likely capture the attention of many aging Americans concerned about their inheritance and providing for their heirs. However, there is another possible change to the law of which many Americans are unaware and which could impact how Americans are able to protect and manage their family assets.

This second possible change in the estate law -- one that has the potential to directly affect an even larger number of Americans -- comes from the courts, and addresses the ability of individuals to ensure that their estate plans are carried out according to their wishes.

The case of Marshall v. Marshall arose following the death of J. Howard Marshall, a wealthy Texan who married former Guess Model and Playboy playmate Anna Nicole Smith. Marshall gave his wife millions of dollars worth of gifts during their brief courtship and marriage, but when he died about a year after their nuptials, she was disappointed to find that he did not include her in his estate.

J. Howard Marshall, who was very concerned about the possible diminution of his estate via the death tax, took great pains in drafting his testamentary plans. The Texas probate court gave his efforts their due, upholding his intentions regarding the division of his assets. Despite all this, Anna Nicole was able to challenge those written plans and, at least temporarily, evade the effect of the Texas court's judgment by bringing a subsequent legal challenge in a California bankruptcy court.

In the course of these legal proceedings, Marshall's painstaking efforts to provide for his son and grandchildren were ridiculed by a federal court, which awarded Anna Nicole millions of dollars based in part upon supposed verbal promises she alleged he made to her prior to his death.

The case has now seen the death not only of J. Howard, but of Anna Nicole and J. Howard's son. It has gone from bankruptcy court all the way to the United States Supreme Court and is now awaiting a decision from the U.S. 9th Circuit Court of Appeals.

This is not just another celebrity case.

If the U.S. 9th Circuit upholds the judgment in Anna Nicole's favor, other estates will inevitably be challenged in a similar fashion based upon this dangerous precedent. Bankruptcy courts will predictably be used as vehicles to attack proceedings in state probate courts, and verbal promises will be relied upon to challenge written estate plans. This will harm the ability of individuals to be certain that their assets are distributed as they see fit after they die, and will necessarily increase the costs associated with estate planning.

In light of these disturbing facts, those who are contemplating the future of their estate should pay attention to both Congress and the courts. Congressional action (or inaction) regarding the death tax, or a bad decision in Marshall v. Marshall would do much to impair the ability of Americans to pass along the fruits of their labor to those whom they wish.

Robert Alt is a senior legal fellow and deputy director of the Center for Legal and Judicial Studies at the Heritage Foundation.